1)
Painted is always good. I even like my sprites this way. I know that Safir can produce this stuff as can Jetryl.
The damage can displayed with a simple layer .
The problems are that you still can't animate them and they are still time consuming to produce and need a higher skillset than small sprites.
I say go first with the map sprites and if you got a critical mass of the painted units switch to it.
Even if you won't succed to get enough of them they are still good enough for small portraits, for the screen and decoration, for flavor texts, ingame descriptions and god knows what else.
This would have the advantage that you could release often while getting more attention. It might not look as professional as you hope too but still you have a higher chance to succeed and still the option to switch back.

2)
3D needs also a lot of work I don't know how much haven't done anything yet.
But I know a semi professional mod for Dawn of war.
Some really good modelers over their but they needed already 2 years for say 10 buildings and 12 Units and animations and they are not finished even yet.
example

If you are not an one man army you can stale the release of the demo for 5 further years.

3)
Good Code is more adaptable than art still good code is also an art so peace

hey what if we use vector graphics for the ff style system ... sure not everyone's a great vector artist (i happen to be a decent one) but they can definitely bring some added bennies to the table. like zoom in/out on critical hits (and not that gay 1 pixel becomes 4 crap that was the bees knees on snes). simple recoloring by defining a layers style code (part of the svg spec). use a shrunken less detailed version of a sprite for walking on the maps (part of the svg spec is to add names to layers, which we could say something like in battle use all layers, but while on the map screen use only certain layers). using layers you could also toggle on/off armor and weapons as well as recolor on the fly. um what else is there ... discuss!

I know almost nothing about vector art. What I do know is that we want to keep this game "artistically consistent", so that it doesn't look like an entire different game when shifting from one context (maps) to another (battles). I think we will do the zoom in on attacks in battle to make the screen less static, and while zooming may not look as good with pixel art than with vector art, I think it will do the job.

as a vector artist i will offer this one bit of advice ... it is very tough to give vector art that "hand painted" look or any other extremely stylized style. they do deliver a cell-shaded (solid outline with flat color and basic solid shading (no heavy blended gradients)) style with outstanding results though. also vector art can be used as a basis for art, if you build your graphics engine properly, kinda like 3d artwork works as a basis for what is rendered. with vector art you can apply pixel effects like motion blurs, depth of field blurs (for say paralaxing foregrounds and backgrounds), as well give artwork glows (like say a torch). you can give text belvels. it's all in the rendering, however the more intensive the rendering is the more processor intensive.

I did not go through the whole 4 pages discussion, so this might be irrelevant, but to answer your original post:

I'd personally go with option number two, if there are no others. To make sure that you get the most of out of it, I suggest a bit more "theatricals" when it comes to drawing swords and the likes, but refrain from using spacial adjustements. That would can a lot of art, but at the expense of more steady advanctement. If you can polish up what's already there enough, it will be a gain in the longterm, but you will need to work a lot on the visual appearance of the monsters in that regard. Scaling them up in comparison to the player character would make artistic sense even though it would appear illogical. Likewise, an inconsistent scale of the bosses seems appropriate as well.

I would say our current solution to this, which involves using our fully animated map sprites in front of a hand-drawn background, is working well currently. (On that topic, though, we really need to get a backdrop for the desert map, and we lack an artist who can do so.)

Yeah I'm happy with our decision to use the map sprites in battle. Its the least amount of work for our artists but they still look awesome. We actually do have a background for the desert rujasu. Safir-Kreuz made it a while back. If you search around in the forums or in his FTP folder I'm sure you can find it.